One of the most important parts of buying that beautiful mountain home of your dreams is planning for the mortgage. Mortgages can often be confusing and understanding how the loan is calculated and the different variables involved will help you make the wisest decision possible and get yourself moved in sooner than later!
To get started you’ll need some information regarding the loan and then you can use a mortgage calculator like this one https://www.mortgagecalculator.org/ or you can get out the pen and paper and do it by hand. But what details do you need?
The Variables
To get things started you will need the following information:
--The amount of the loan, also known as the “principal.” This is the purchase price minus the down payment.
--The interest rate of the loan.
--The term of the loan which is the number of years there are to repay.
--Whether the loan is fixed-rate or adjustable.
--The market value of the home
--Your income
Calculate Mortgage Payment for a Fixed Rate Loan
The calculations for your potential mortgage payment depend upon whether the loan is fixed or adjustable. The interest rates for fixed loans stay the same while adjustable ones change.
Fixed-rate loans keep the same interest rate during the term of the loan which is usually 30 or 15 years. The formula for these loans is Mortgage Payment=Amount/Discount Factor (P=A/D)
The loan amount is easy to come up with, but the Discount Factor is a number derived from the payment per years times the number of years as well as the annual interest rate divided by the number of payments per year (Discount Factor (D) = {[(1 + i) ^n] - 1} / [i(1 + i)^n])
Here is an example of a $200,000 loan borrowed at 6% for 30 years.
A=200,000
n=360 (30 years times 12 monthly payments per year)
i=.005 (6 percent divided by 12 monthly payments per year)
D=166.7916={[(1 + .005) ^360] - 1} / [.005(1 + .005)^360])
P=A/D=200,000/166.79.16=1,199.10
Your mortgage payment would be $1,199.10 for a $200,000 loan at 6 percent fixed rate for 30 years.
Calculate Payment for an Adjustable Rate Loan
An Adjustable-Rate Mortgage (ARM) are loans where the interest rates change. This results in a new monthly mortgage payment. Calculating that new payment requires the creation of a new amortization schedule each time the rate changes. You will need the following information to make that calculation:
--The amount of monthly payments outstanding
--A new amortization schedule. This article can help create one: https://www.thebalance.com/what-is-an-amortization-table-315520
--The “new” loan amount which is the current outstanding loan balance
--The new interest rate.
For example an adjustable rate loan balance of $100,000 with ten years left and a new rate of 5 percent would require a payment of $1,060.66
How Much Interest Are You Paying?
In addition to figuring your potential mortgage payment, it is also useful to know how much of your payment would go to interest versus paying off the principal. Again, an amortization table is helpful here as it can show you on a month to month basis how much of your loan goes where.
In addition to knowing your mortgage payment, this calculation can help you decide if you want to borrow less or choose a less expensive home. It can also help you decide to wait and find a lower interest rate. Finally, it will help you decide whether a longer or shorter term loan is the best given your current income.
Take some time to crunch the numbers and see what the best options are, then get ready and find that home of your dreams!
